2013/06/13

Matthias Chang: The US Federal Reserve Does Not Print Money!

Says Dr. Lacy Hunt. In the Hoisington Quarterly Review and Outlook, Dr. Lacy Hunt wrote and we quote: The Federal Reserve is printing money. No statement could be less truthful. The Federal Reserve is not, and has not been, printing money, as defined as an acceleration in M2 or money supply. Just check the facts. For the first quarter of 2013, the FED purchased $277.5 billion in securities as their securities net, as their portfolio expanded from $2.660 trillion to $2.937 trillion. A review of post war economic history would lead to a logical assumption that the money supply (M2) would respond upward to this massive infusion of reserves into the banking system. The reality is just the opposite. The last week of December, 2012 showed M2 at $10.505 trillion, but at the end of March, 2013 it totaled only $10.450 trillion, which was an unexpected decline of $55 billion. Printing Money? No. Please read the words which I have highlighted in bold and underlined. Any novice in economics and monetary policy will have no difficulty in identifying the flaw in Dr. Lacy Hunt's contention, as he equated the printing of money, digital or otherwise, with the acceleration in M2 or money supply. The acceleration in M2 is a consequence of the FED printing money in certain circumstances. We will address this issue in a moment. But, to say that because there was not a corresponding acceleration in M2, therefore was no money printing by the FED, is to put it kindly, drawing on the wrong conclusions. But, first let us point out a critical fact which Dr. Lacy Hunt has not denied, and this is the fact that the FED has expanded the monetary base from $840 billion to $2.93 trillion. How did the FED increase the monetary base from a mere $840 billion to $2.93 trillion? The answer is simple. By a click of the computer mouse, thereby digitally creating virtual money, which enabled the FED to embark on its various bail-out schemes, following the financial tsunami of 2008, and thereafter the massive quantitative easing (QE) programs. The digital money was employed in two specific areas, first to purchase toxic assets from the insolvent Too Big To Fail Global Banks, and secondly to finance the US government debts by purchasing US treasuries. Purchase of Toxic Assets from Banks. Why did the FED print money to buy toxic assets? The banks were all insolvent, even till to-date. The toxic assets of banks in ordinary circumstances, Old Normal, would have to be written off, if marked to market. They were all junk assets, and ought to be treated as such.